Four Years After BP Spill, a Shallow-Water Revival

Big oil has largely lost interest, but independent companies say a resurgence is afoot after years of decline.

Oil or natural gas rig in Galveston Bay, Texas.
National Journal
Ben Geman
June 11, 2014, 1 a.m.

For well over a dec­ade, oil and nat­ur­al-gas drilling in the shal­low fed­er­al wa­ters in the Gulf of Mex­ico have been in a seem­ingly un­end­ing de­cline.

Fed­er­al data show that oil pro­duc­tion in wa­ters less than 1,000 feet deep — a rough bench­mark for shal­low wa­ter, or the “shelf” — fell from 830,000 bar­rels per day in 1997 to 381,000 a dec­ade later and has kept fall­ing. Gas pro­duc­tion dropped sig­ni­fic­antly too.

Hur­ricanes such as Kat­rina in 2005 and Ike in 2008 took their toll, but they only ex­acer­bated a de­cline that was already long un­der­way. And then the 2010 BP dis­aster — in vastly deep­er wa­ters farther from shore — brought per­mit­ting to a crash­ing halt for a time as reg­u­lat­ors im­posed new safety re­quire­ments. The pro­duc­tion drops con­tin­ued through 2013, ac­cord­ing to fed­er­al data.

In the af­ter­math of the BP spill and the per­mit­ting freeze that fol­lowed, in­dustry of­fi­cials and Obama ad­min­is­tra­tion crit­ics warned of a mor­tal blow to the Gulf’s oil and gas de­vel­op­ment.

The en­su­ing slow­down in per­mit­ting played a role in the over­all drop in post-spill Gulf pro­duc­tion. But in shal­low wa­ter spe­cific­ally, if the policies are a hurdle, they’ve not been enough to stop a re­cent flurry of de­vel­op­ment.

Four years later, the shal­low-wa­ter re­gion has seen a whirl­wind of deal-mak­ing as ag­gress­ive play­ers snap up as­sets. Ac­cord­ing to the prom­in­ent en­ergy con­sult­ing firm Wood Mack­en­zie, over the past year, mer­ger-and-ac­quis­i­tion activ­ity fo­cused on the shal­low-wa­ter Gulf of Mex­ico has totalled roughly $7 bil­lion.

Late last year the private-equity-backed Field­wood En­ergy closed its $3.75 bil­lion deal for the shal­low wa­ter as­sets of Apache, a big com­pany with world­wide op­er­a­tions. An­oth­er ag­gress­ive play­er, En­ergy XXI, this month com­pleted its $2.3 bil­lion deal for EPL Oil & Gas. It also bought $1 bil­lion worth of Ex­xon Mo­bil’s as­sets in late 2010.

“It is a very sig­ni­fic­ant amount of money for an area that is of­ten for­got­ten about by a lot of people,” said Jeremy Sherby, a re­search ana­lyst with Wood Mack­en­zie.

While oil-and-gas gi­ant Chev­ron re­mains a ma­jor shal­low-wa­ter pro­du­cer, and Ex­xon still has a small pres­ence, a num­ber of the so-called su­per­ma­jors are no longer act­ive in the re­gion, which has been picked over for dec­ades.

The biggest com­pan­ies “sold massive amounts of the shelf prop­er­ties to new, more ag­gress­ive, sin­gu­larly fo­cused [ex­plor­a­tion and pro­duc­tion] com­pan­ies,” said Jim Noe, an ex­ec­ut­ive with the rig com­pany Her­cules Off­shore. His cus­tom­ers now in­clude shal­low-wa­ter play­ers that sev­er­al years ago “didn’t ex­ist or you had nev­er heard of them.”

The activ­ity among in­de­pend­ent play­ers in re­cent years may trans­late in­to an un­ex­pec­ted oil-pro­duc­tion re­viv­al at a time when the in­dustry is fo­cused in­land on the frack­ing-fueled shale en­ergy boom and on the deep­wa­ter fron­ti­ers far from shore.

Shal­low wa­ter-fo­cused com­pan­ies and ana­lysts say a con­ver­gence of factors has led to the re­newed in­terest in oil pro­duc­tion.

“There is a big re­sur­gence of the Gulf as far as the oil plays are con­cerned,” said Greg Smith, vice pres­id­ent for in­vestor re­la­tions with En­ergy XXI, who notes the com­pany has more rigs cur­rently act­ive than ever be­fore.

Oil prices are strong, while nat­ur­al-gas prices — which un­like oil prices are not glob­al — have tumbled over the last dec­ade thanks to the in­land U.S. frack­ing boom.

Ac­cord­ing to a re­cent in­vestor present­a­tion from Her­cules Off­shore, “As oil prices di­verged from nat­ur­al gas, [ex­plor­a­tion and pro­duc­tion] com­pan­ies have shif­ted drilling pro­gram[s] to tar­get oil.”

“The eco­nom­ics are a lot bet­ter on an oil well than a gas well,” Sherby said.

Sherby said com­pan­ies that have been snap­ping up shal­low-wa­ter as­sets are likely fo­cused spe­cific­ally on that re­gion, com­pared to much lar­ger firms that can make strong re­turns in in­land shale plays like the Eagle Ford in Texas, or have the massive cap­it­al needed for deep­wa­ter pro­jects.

“It is be­com­ing a re­gion dom­in­ated by spe­cialty play­ers,” he said. “The buy­ers in these trans­ac­tions are more likely to drill more and drill more ag­gress­ively.”

Noe said that ad­vances in seis­mic ex­plor­a­tion tech­no­logy have yiel­ded in­form­a­tion that shows oil pro­duc­tion could make a big comeback in shal­low wa­ters.

“The in­dustry by and large ad­vances very meth­od­ic­ally from a tech­no­logy stand­point and some would say slowly,” says Noe, the com­pany’s seni­or vice pres­id­ent, but adds: “One area that has ad­vanced at break­neck speed is seis­mic.”

“We are find­ing oil that was long since be­lieved to have been pro­duced,” said Noe, whose com­pany has been able to sub­stan­tially in­crease its per-day rates for rigs as de­mand re­bounds. New­er tech­no­lo­gies have giv­en com­pan­ies the abil­ity to see oil through salt form­a­tions.

Smith, of En­ergy XXI, said use of ho­ri­zont­al drilling in areas with ex­ist­ing de­vel­op­ment is en­abling the in­dustry to “sta­bil­ize” the re­gion’s oil pro­duc­tion de­cline. “At $100 per bar­rel, we can drill these ho­ri­zont­als all day long,” he said.

To send it back up­ward, Smith said, de­pends on the suc­cess of new pro­jects en­abled by tech­no­lo­gic­al ad­vances such as bet­ter seis­mic tech­no­logy, which he said can “re­define the shal­low-wa­ter Gulf.”

Not every­one is so bullish.

“The costs are so great in shal­low wa­ter now and there’s really no big ele­phants. The eco­nom­ics don’t work, so we don’t have as much play in the shal­low wa­ter,” said Don Briggs, the pres­id­ent of the Louisi­ana Oil and Gas As­so­ci­ation, who says post-BP spill reg­u­la­tions and oth­er factors have made shal­low wa­ter less at­tract­ive.

In­teri­or De­part­ment drilling per­mit data shows an up­ward tra­ject­ory since the ma­jor slow­down that fol­lowed the BP dis­aster.

Still, des­pite all the activ­ity, Sherby says he doesn’t ex­pect total shal­low-wa­ter oil and gas pro­duc­tion to out­right re­verse the long de­cline.

“If any­thing it will just make the de­cline less pro­nounced,” he said. Un­less …

“The big wild card … is the ul­tradeep trend,” Sherby adds. He’s re­fer­ring to gas re­sources far, far be­low the sea­floor at high pres­sures in a re­gion called the In­board Lower Ter­tiary/Creta­ceous that com­pan­ies such as Free­port-Mc­Mor­an hope to de­vel­op.

“If that ever be­comes com­mer­cial and gas prices make it eco­nom­ic­ally vi­able, that could po­ten­tially re­verse the de­cline,” he said. “But that is still pretty un­proven from a com­mer­cial stand­point.”

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